Pensions and Annuity
‘Pension’ is a word that everyone will hear throughout their career, and something that people will have at least some knowledge about, but the term annuity may be a bit of a puzzle. In its simplest form an annuity is the most common method of changing your pension contract into an income for retirement. You basically pass funds from your pension over to an insurance company who then provide you with an income for the rest of your life on a specified basis. It's a very simple product and the basics are easy to understand.
The best part of the annuity agreement is that your income is guaranteed and is payable until your death.
The earliest age you can change to an annuity is 55, and there is now no maximum limit it can be taken until, after the Government scrapped a maximum age limit of 75.
The amount of annuity that you receive will depend on your gender, age, and the options that you have chosen. It's common for a man to receive a larger income amount than a woman as a man's life expectancy is shorter. Women however generally receive theirs for a longer term.
A financial adviser can shop around for you to find the best annuity option to suit your needs. The annuity providers will offer differing rates as they all have different opinions on life expectancy, and the type of business they want to attract. The rates are also affected by gilt yields and therefore interest rates. This means that the annuity rates that are available on the market change on a regular basis, sometimes daily, which means it can be difficult to keep up with changes without the help of a financial adviser.
Some companies may base their annuity rate on life expectancy and certain medical circumstances. If you've had medical conditions in the past (not necessarily serious) it may be best to consider an option such as a smoker's annuity or an enhanced or impaired life annuity, as these can provide a higher income.
When you know when you'd like to get the benefits from your pension there are a few annuity options to choose from. This is when it can become very in-depth and complicated, but we'll keep it brief for now.
These options include;
1. An escalating annuity
By adding this option it means that the annuity is increased each year, by either a fixed amount or an index such as RPI. It is worth noting that adding things here and there, such as escalation, will mean you receive less of annuity at the outset; the more you add the less income you will receive.
2. A Spouse's Pension
The addition of a Spouse's pension means that, should you die before your spouse, they will continue to receive an income from your annuity. This can be at the same level as your pension was, or it could reduce to a lesser amount such as 66% or 50% of what your pension was. Again, the higher the value of the option you pick, the more expensive it is and, therefore, the less income you will receive at outset.
3. A Guaranteed Period
This is to ensure that any payments made by the annuity do not change should you die in the early years of the contract. The annuity will continue to pay out as if you were still alive for the remainder of the guaranteed period. The most common guaranteed period is 5 years but you can elect to guarantee your payments for up to 10 years.
As always, it's best to consult a financial adviser if you are considering taking out an annuity. And remember - once you have bought your annuity you cannot change to another provider or cash it in. Therefore it's obviously crucial to ensure you have the right option from the very beginning.
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